- March 9, 2024
- Posted by: legaleseblogger
- Category: Related News
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**Analyzing Incentives for Banks with Customers Who Do Not Allow Interest to Accrue**
When it comes to credit cards that provide lucrative rewards, one might wonder what prompts banks to continue offering enticing benefits to customers who actively avoid accruing interest. The question arises: is there a hidden motive behind this seemingly generous gesture by financial institutions?
Understanding the nuances of how and when interest is applied can shed light on this issue. By delving deeper into the mechanics of credit card interest calculations, one can gain a clearer perspective on the incentives driving banks to maintain attractive rewards programs for customers who prefer not to accumulate interest charges.
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In conclusion, by exploring the underlying motives behind banks’ incentives for customers who do not allow interest to accrue, individuals can make more informed decisions about their credit card usage. With the assistance of AI Legalese Decoder, consumers can navigate the complexities of credit card agreements and take full advantage of the benefits offered by their financial institutions.
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****** just grabbed a
Merchants pay a fee to accept credit cards. That fee is higher than the rewards they pay out.
Aside from merchant/transaction fees, there’s also the goldmine of data that can be sold.
* https://franklinetech.com/how-your-credit-card-is-secretly-collecting-data/
Credit card companies charge businesses, on average, 2.8% plus $0.30-0.50 per transaction every time you swipe your card. They knife the businesses as well as earn interest and charge fees on borrowers.
Keep in mind they don’t have to make money off every single customer. They will lose money on some, but overall their business model is still very profitable. Think of casinos, they know some gamblers will make money off them, most won’t however, so it works out.
“I don’t pay them a cent of interest and make tons of cash back and rewards off them! Don’t they care?!”
*Looks at the* ***millions*** *of other customers standing right behind you who let the balances persist, pay tons of interest and tons of late fees.*
No. No they do not.
Swipe fees. The main demographic for the most lucrative rewards cards are people that have a good amount of money and spend a lot: this makes the banks money off swipe fees.
Transaction fees, data mining, and the chance that you’ll carry a balance and pay interest.
Beyond the fees it’s a number game. For everyone who pays the cards off, two don’t.
also not mentioned- studies show even responsible credit card users spend more when using a card
They get a cut on the transaction from the merchants
1. 2-3% Merchant transaction fees
2. 20-30% Interest and late fees paid by a large percentage of credit card users who do NOT pay off their balances monthly
2. Annual card fees (if applicable)
For every financially responsible person paying their statement in full every month, there are a 1000 idiots that pay interest and 1000ÔÇÖs of more people that live pay check to pay check and canÔÇÖt afford all their necessities so it goes on credit. They subsidize (along with all the other stuff people have said) those who do pay their statement in full each month.
credit card companies are making so much money right now it’s crazy
I had some credit problems in the past, even playing the *rob Peter to pay Paul* game for awhile. Eventually I dug myself out, payed them all off and canceled all but one airline rewards cards. Now I pay the balance off twice a month and I have not paid a penny of credit card interest in almost 4 years.
I can tell you the limit increase offers dried up, I used to get them every couple of months. Why wouldnÔÇÖt I, I was a fucking cash cow for years! I did however find out that I could call them and ask for a credit increase and get it no problem. I now put every possible expense through the card and fly everywhere for free.
I used to use Citibank and they liked to answer the phone saying, “thank you for being a great customer since …” And one time the person said, “woah, you’ve had this credit card longer than I’ve been alive”. And I asked if I really was a good customer since I never paid any interest and they said that yes, while they like customers that pay interest, they still make money on me, so are happy that I was a customer as well.
I work in the credit cards space so this is what my understanding is, banks make money of the interchange and merchant fees. This fee is distributed between the bank and the network (Visa and Mastercard). Most cards offer $1 for every $100 spent so they still make some money even after giving you points. Even when you spend the points to get gift cards or tickets the bank gets a certain % as commission, example you redeem a $100 amazon gift card, the bank gets $5 as part of an agreement with Amazon.
YouÔÇÖre right that banks make very little money off good customers but they always try to keep a healthy mix of customers. When the economy is doing well and credit defaults are low they rely on revolvers ( people who donÔÇÖt pay bills on time) for money. When the economy is doing poorly they rely on transactors (people who pay in full) to smoothen out return.
Another thing to consider is that banks use credit cards to compete for your business. Banks want to be your financial provider for everything, mortgage, auto loans, deposits, etc. They use premium cards to acquire high net worth customers so that they can provide other services like wealth management.
Fees they collect from transactions from the merchant.
When I was in college I had 0 financial literacy and end up settling a credit card. 8 years later, I got another CC and I pay the balance in full every month to cash in that 2% cash back. I feel like its a bit dynamic with new users.
Interest is not the only way to make money. Swiping either a credit or debit card costs the merchant money. The issuing bank, card provider, and merchant service middleman tapes a processing fee (a few percent per tx depending on volume).
Paying a few percent when someone purchases something is worth it for faster clearing and not having to handle, count, deposit cash.
Secondly there are other ways they make money, advertising or partnering with vendors to suggest to you. Like “get a discount when you make a charge to xyz hotel” etc.
Banks also make money off your deposits as it sits in a account so even if you bank at the same place as your card issues they could subsidize costs.
Yes interest is the gotcha but just like any business there is more than 1 channel of opportunity.
1. Merchant fees: Visa/mastercard/discover/amex pay a fee to the issuing bank for card transactions.
2. Data: banks get huge amounts of spend data that can be a competitive advantage against other banks when trying to get business clients.
3. Often times cc customers will open checking/savings, as well. Banks need deposits and investments for lending requirements.
Merchants are already paying fees whenever someone use their card. It’s why small businesses tend to have a minimum purchase requirement. If it’s too low, the store ends up in the negative due to fees. Even chargeback incurs fee to the merchant (which is why someplaces will ban you if you do one).
So at the end of the day, credit card companies already got paid. If you don’t pay in full, that’s just cherry on top.
Businesses pay them a fee to accept cards
Swipe fees. On a $3000/mo revolving balance the issuing bank, VISA/MC, and processors are splitting something like $50/mo anyways.
Transaction fees and data mining that can be sold to data brokers.
For every person who pays off balance every month, there are a ton of people who carries over balance.
Not everyone pays on time. They don’t have to name interest off event to make a profit.
Banks get their profits from users who do not pay off their balances each month; interest rates are very high right now. Additionally, banks and credit card networks charge merchants interchange fees for taking credit cards as payment. So banks get a slice of these fees even for users who pay off their balances. Most interchange fees are around 3%.
Transaction fees that retailers pay the card companies adds up to a lot of revenue. Plus they bank on the majority of their card users carrying a balance.
It seems like every new year Americans are carrying a record amount of credit card debt.
Card issuers make money from several sources. Each transaction has a fee which the issuer collects. If a card balance is not paid off, interest is another revenue source. Promotions are a third source, usually paid by the purveyor of the item/service being promoted. Advertising in some cases provides a revenue source.
The ones who don’t pay it off monthly makes up for those who do.
The CC companies are VERY good at what they do. They make their profits off the people who dont have the means to pay it off monthly, and give a tiny fraction of those profits to those who do live within their means on credit cards.
I seem to recall hearing that the card companies refer to folks who donÔÇÖt carry a balance as ÔÇ£deadbeatsÔÇØ because theyÔÇÖre not worth anything to the company. Might me an urban legend but it sounded reasonable enough haha.
Interchange is capped. Interest rate and fees pays for the rewards. According to bankrate.com 49% of Americans carry a credit balance.